London home values put in jeopardy by shrinking City

While London is relatively well insulated from public sector cuts, a shrinking City of London poses a significant risk to the future direction of house price movements in the capital.

Cebr’s recent forecasts for the City show a cull of 27,000 jobs over the course of 2011 and a fall in bonuses of roughly 40% year on year.

Investment in housing usually constitutes around a third of total bonuses on average suggesting subdued demand for homes in the capital and the South. The latest figures released by the Office for National Statistics show the UK economy as a whole performing above expectations – growing by 0.5% quarter-on-quarter in Q3 2011. This provides some evidence that we are not at risk of entering another recession (two-successive quarters of negative growth), but recent GDP growth has not been strong enough to stem the flow of job losses over 2011.

The UK housing market continues to be in a state of extreme uncertainty. Depending on the analysis, house prices have either now hit a floor through which they cannot pass or are overvalued to point of posing a significant risk to the UK’s economic recovery. One thing is apparent, nationally, house prices have tussled in either direction since the beginning of the year, in line with a host of other macroeconomic indicators for the United Kingdom.

This is not unheard of. Broadly speaking, financial crises are protracted affairs. A historical study by Carmen Reinhart and Kenneth Rogoff (2008) showed that real house price declines averaged 35%, stretched out over six years, in the aftermath of severe financial crises in advanced economies. At their lowest point, in 2009, UK house prices were only 17% below their 2007 peak – a figure which has since shrunk to 10%.

But there are reasons for cautious optimism. The number of mortgage approvals in August rose to its highest level since December 2009 and remained above 50,000 in September. The increase in the size of the Bank of England’s Asset Purchase Facility to £275 billion should further help to boost investor confidence as well as asset price pressures in the short term.

Robert Bartlett, Chesterton Humberts’ CEO, comments:

“London has been relatively unscathed by the recession and its aftermath. International buyers seeking a safe haven of value still equate prime London property with other secure portfolio investments such as gold. But the continuing economic turmoil in Europe and the perceived threat to the financial services sector will dampen traditional bonus purchases.

“London’s relative stability has masked the increasing divergence of prices between London and the rest of the country. Over the year to date prices have risen by 3.6% in the most expensive fifth of property areas, all in London, and fallen by -4.5% in the least expensive fifth.

“The current Eurozone crisis is being felt right across the UK, Including London, as sentiment has turned from the cautious optimism we witnessed in the Spring to negativity. Overseas investors still look to London for ‘safe’ investment but everyone remains nervous. The Country market remains very difficult.”

Douglas McWilliams, Chief Executive of CEBR, comments:

“The drop in both bonus payments and the number of City-type jobs is concerning for London as a financial centre and a destination for inward investment. With financial services helping drive the capital’s economy and playing a leading role in its housing market, subdued activity in the City is a concern for the asset values over the coming year.”

“The latest official figures show that the UK escaped negative growth in the third quarter of the year, but a weak labour market and continued uncertainty in the Eurozone is likely to impact house prices in the short-term”.